Don't bank on too big to fail

Americans still face scary economic times — and one of the most frightening institutions is “big banking.” Efforts to save the finance industry, clean up the banks, and reform regulations to restore trust and confidence in our system haven’t worked. Banks today are bigger and more opaque than ever, and they continue to behave much as they did before the 2008 crash.

Consumers assume Wells Fargo is protected from trading losses by $148 billion in capital reserves, making any particular loss minuscule. Page 164 of the annual report carries the notation: “...2011, we incurred a $377 million loss on trading derivatives related to certain CDOs” — collateralized debt obligations. In the past, a bank’s nine-figure loss on these sorts of complex financial instruments would have generated major headlines. This loss went unreported by top investors, analysts, and financial pundits.

“Were analysts so numbed from bigger bank losses this shortfall didn’t matter? Are massive CDO-derivatives losses essentially amulti-hundred-million-dollar tree falling silently in the financial forest?” Until the 1980s, bank rules were few — but broad in scope. Regulation was focused on commonsense standards. Commercial banks were not permitted to engage in investment-banking activity and were required to reserve a reasonable amount of capital. Bankers were prohibited from taking outsized risks. Not every financial institution complied with the rules, but those who strayed were judged and punished.

Since then rules have proliferated, compliance arguments are so convoluted that punishments are minor and rare. Not one major senior banker has gone to prison for conduct related to the 2008 financial crisis — few even paid fines. Penalties paid by banks are paltry compared with their profits and bonus pools.

Andrew Haldane, Bank of England financial stability director, considers the 1933 Glass-Steagall Act “...perhaps the single most influential piece of 20th century financial legislation.” In contrast, voluminous Dodd-Frank law required regulators to create so many new rules (still partially undefined) it could grow to 30,000 pages of legal minutiae when fully codified.

Obeying persistent ‘banking lobby’ pressure, Congress wrote a complicated rule. Then regulators burdened it with additional complications, attempting to cover any and every contingency. Thirty months after Dodd-Frank, the Volcker Rule still isn’t law.

“Congress and regulators could have written a simple rule: ‘Banks are not permitted to engage in proprietary trading.’ Period. Then, regulators, prosecutors, and the courts could have set about defining what proprietary trading meant by establishing reasonable and limited exceptions in individual cases.”

Eisinger reports Wells Fargo and JP Morgan are two banks driving mortgage interest rates higher than they should be. Mortgage lending has become ridiculously profitable because the “spread” between lenders’ costs and mortgage rates are much bigger now.

“... government actions have fueled the extremes in income distribution through taxpayer bailouts, central-bank-engineered financial asset bubbles and unjustified tax breaks favoring the rich.” (Sheila Bair, former FDIC Chairwoman)

During her Senate Banking Committee hearing debut, freshman Senator Elizabeth Warren (D-MA) unsettled federal regulators when she asked a simple question: “When was the last time you took a big Wall Street bank all the way to trial?” Not one regulator offered an example.

The Boston Globe, “Warren is the advocate for Americans getting crushed by predatory lenders and under-regulated banks.” Perhaps Elizabeth can prompt revival of a banking system Americans can actually “bank on.”